Cross border mergers and acquisitions: impact on the banking industry

Abstract

The banking industry worldwide has seen a spate of large mergers and acquisitions in the last decade. Motivated by factors like international expansion, higher market power, economies of scale and access to technological innovations, the trend has gradually shifted from domestic consolidation to cross-border activity. Deregulation has eliminated the barriers between conventional banking and other financial services, and the industry is gradually converging towards the creation of financial supermarkets, which would offer a wide range of financial products and services across the globe. The recent merger wave created some of the largest corporations in the world. In the US, the Citicorp and traveler’s Group deal was valued at USD 70 billion and was ranked as the largest corporate merger in history. The introduction of the Euro was the main driver of the consolidation in the European Banking Industry; while in Asia, the increased M & An activity was primarily driven by exchange rate depreciations, lower domestic asset prices, and liberal policy framework towards foreign investment. While excessive competition may create an unstable banking environment, insufficient competition and lack of contestability may breed inefficiencies. The HHI index is a good measure of the impact of M&A on competition and the Structure- Conduct-Performance (SCP) paradigm is useful to analyze the effects of bank concentration. While some argue that concentration would intensify market power and thereby stymie competition and efficiency, others believe that increased concentration goes hand-in-hand with efficiency improvements. Thus mixed views have been expressed in the literature on this subject. Similarly, mergers can create job opportunities through branch expansions of banks might lead to job losses as a consequence of post-merger rationalization measures.